Sanctions could have wide impact
WASHINGTON — The most punishing sanctions U.S. officials have threatened to impose on Russia could cause severe inflation, a stock market crash and other forms of financial panic that would inflict pain on its people — from billionaires to government officials to middle-class families.
U.S. officials vow to unleash searing economic measures if Russia invades Ukraine, including sanctions on its largest banks and financial institutions, in ways that would inevitably affect daily life in Russia. But the strategy comes with political and economic risks. No nation has ever tried to enact broad sanctions against such large financial institutions and on an economy the size of Russia’s. And the “swift and severe” response U.S. officials have promised could roil major economies, particularly those in Europe, and even threaten the stability of the global financial system, analysts say.
Some analysts also warn of a potential escalatory spiral. Russia might retaliate against an economic gut punch by cutting off natural gas shipments to Europe or by mounting cyberattacks against American and European infrastructure.
The pain caused by the sanctions could foment popular anger against Russian President Vladimir Putin. But history shows the country does not capitulate easily, and resilience is an important part of its national identity. U.S. officials are also sensitive to the notion they could be viewed as punishing the Russian people — a perception that might fuel anti-Americanism and Putin’s narrative that his country is being persecuted by the West.
From Cuba to North Korea to Iran, U.S. sanctions have a mixed record at best of forcing a change in behavior. And while the Biden administration and its European allies are trying to deter Putin with tough talk, some experts question whether they would follow through on the most drastic economic measures if Russian troops breached the border and moved toward Kyiv, Ukraine’s capital.
President Joe Biden has said he will not send U.S. troops to defend Ukraine. Instead, U.S. officials are trying to devise a sanctions response that would land a damaging blow against Russia while limiting the economic shock waves around the world — including in the United States. Officials say for now, the Biden administration does not plan to target Russia’s enormous oil and gas export industry; doing so could drive up gasoline prices for Americans already grappling with inflation and create a schism with European allies. But many experts on sanctions believe the boldest sanctions against Russia’s financial industry, if enacted, could take a meaningful toll.
“If the Biden administration follows through on its threat to sanction major Russian banks, that will reverberate across the entire Russian economy,” said Edward Fishman, who served as the top official for Russia and Europe in the State Department’s Office of Economic Sanctions Policy and Implementation during the Obama administration. “It will definitely affect everyday Russians.”
Fishman added: “How are you going to change Putin’s calculus? By creating domestic disturbances. People will be unhappy: ‘Look what you did — all of a sudden my bank account is a fraction of what it was? Thanks, Putin.’ ”
Sanctions imposed after Putin annexed Ukraine’s Crimean Peninsula in 2014 and gave military support to an insurgency in the country’s east created a modest drag on Russia’s economy. Those penalties and later ones took a surgical approach, heavily targeting Putin’s circle of elites as well as officials and institutions involved in aggression against Ukraine, in part to avoid making ordinary Russians suffer.
U.S. officials say the impact of sanctions now would be categorically different. Washington is looking to take a sledgehammer to pillars of Russia’s financial system. The new sanctions U.S. officials are preparing would cut off foreign lending, sales of sovereign bonds, technologies for critical industries and the assets of elite citizens close to Putin.
But the real damage to Russia’s $1.5 trillion economy would come from hitting the biggest state banks as well as the government’s Russian Direct Investment Fund, which has prominent Western executives on its advisory board. The Treasury Department would draw from its experience targeting Iranian banks under former President Donald Trump, although Iran’s banks are much smaller and less integrated into the global economy than Russian banks. Once the department puts the Russian banks on what officials call its “game over” sanctions list, known as the SDN list, foreign entities around the world would stop doing business with the banks, which would have a big effect on Russian companies.
The United States would also enact sanctions to cut lending to Russia by foreign creditors by potentially $100 billion or more, according to Anders Aslund, an economist and author of an Atlantic Council report on U.S. sanctions on Russia. Although Russia has taken steps since 2014 to rely less on foreign debt for expenses, such a loss could still devalue the ruble, shake the stock market and freeze bond trading, Aslund added. His report estimated the 2014 sanctions reduced Russia’s annual economic growth by up to 3 percent, and new sanctions could bite much harder.
For an average Russian, the harshest U.S. measures could mean higher prices for food and clothing, or, more dramatically, they could cause pensions and savings accounts to be severely devalued by a crash in the ruble or Russian markets.